There was a time, roughly a year ago, when the conventional wisdom was extremely favourable to e-commerce projects. Today, it is fashionable to be cynical about what the Internet can do; to claim that the Internet does not particularly transform the modern economy. Both positions are equally wrong.

We can understand a lot about this by looking at a clutch of companies in America which are at the frontiers of the Internet revolution. The stock market returns of this group, over the last one year are (figures in percentage): Sun (-28), Ariba (-40), Ebay (-47), Microsoft (-63), Amazon (-80), Priceline (-82) and Yahoo! (-86). So we do see some fairly dramatic and negative stock market returns amongst the pure e-commerce companies.

At the same time, e-commerce has been doing extremely well! In 2000, online sales grew by a full 60 per cent. The numbers, in absolute terms, are now quite imposing: Amazon became a retailer doing $3 billion (Rs 15,000 crore) of sales, and Yahoo became a media company with $l billion (Rs 5,000 crore) of sales. The sheer headcount of registered users is daunting, with Ebay at 23 million, Amazon at 29 million and Yahoo at 236 million. Priceline now sells 6 per cent of all plane tickets in America.

Hence, the three e-commerce companies got fabulous revenue growth of 68 per cent (Amazon), 89 per cent (Yahoo!) and 92 percent (Ebay). The companies upstream of e-commerce did well: Sun got revenue growth of 46 per cent and Ariba got 585 per cent. These were in sharp contrast with the anaemic 7 per cent growth seen at Microsoft, which is primarily not in the Internet area.

Of the pure e-commerce firms, perhaps the most impressive is Ebay, the auction site. It is effectively an exchange for used consumer durables. Now all successful exchanges generate a "network externality": because NSE is liquid, the order flow tends to go to NSE, which makes NSE liquid. This throws up strong entry barriers. Ebay has this powerful network externality working for it and it is highly unlikely that a competitor will be able to do an exchange for used consumer durables. This has given Ebay fabulous financials. NSE charges a transaction fee of 0.003 per cent, and Ebay charges between 8 per cent and 18 per cent even though it does not provide the credit guarantee of the National Securities Clearing Corporation (NSCC). Ebay earns an amazing $2.9 million of revenue per employee per year. It is profitable, and is now worth $12.5 billion.

Elsewhere, this euphoric growth has gone along with difficulties on profits. Amazon hopes to be profitable in a year. Yahoo! and Ebay are profitable today. Priceline and Ariba managed to have losses larger than revenues in 2000.

In summary, B2C e-commerce is emphatically not a failed industry. The players today have created impressive wealth: the market capitalisations are at $5 billion (Amazon), $12.5 billion (Ebay) and $19.6 billion (Yahoo!). Even Priceline, a highly flawed execution of a great idea, has a market capitalisation of a half billion dollars.

B2C has lived up to early dreams of euphoric growth and windows of opportunity for new players to elbow into old industries. These statements remain true even though (a) most B2C projects have failed and (b) stock market returns on B2C firms have been negative over the last year.

The outlook is more pessimistic with B2B projects. At some level, intensive "internet-centric business-to-business" transactions do take place on the net. However, the dream of the B2B world was the creation of exchanges. It was the dream of having something as amazingly liquid as NSE, working in other areas.

This has not worked out. To my knowledge, there is not one plausibly liquid B2B exchange in the world. The problems faced here have been deep-set.

• Most traditional firms had legacy systems and procedures for handling the supply chain. To harness B2B exchanges, firms would need to comprehensively re-engineer their internal operations. Since most firms did not do so, the B2B exchanges languished. Indeed, it is typical to find political battles inside firms where individuals who stand to lose their jobs from the success of B2B exchanges are seen to lobby in favour of the conservative position of avoiding e-commerce.

• In many vertical industries, some visionary firms thought they would obtain a first-mover advantage by establishing B2B exchanges that they would control. In many cases, the laggards were bright enough to see how unfair it would be to have a liquid B2B exchange that was controlled by their competitor. (Look back at the conflicts of interest that come from brokers and speculators controlling stock exchanges). Hence, the laggards often boycotted the B2B exchange at a time when it needed their order flow the most. In the future, B2B exchanges will need to be set up as professional enterprises with an arms-length relationship with users (e.g. a stock exchange where brokers or speculators have no say in the management). This transformation of governance for B2B projects will take time.

• The interoperability between IT systems of multiple firms has proved to be much harder than envisioned, XML was supposed to make things much easier, but a lot of time was wasted in standard wars on XML vocabularies. The dust has now settled, and we now have one major vendor-neutral standards effort (http://www.ebXML.org). However, in these months, the B2B industry has lost momentum and the opportunity to obtain liquidity.

In summary, the conventional wisdom of being dismissive about the Internet is inconsistent with the facts. While many B2C firms have gone bankrupt, and the stock market returns of B2C firms over the last one year have been bad, B2C e-commerce has indeed produced some remarkable growth rates and some remarkable new firms.

The dream of B2B exchanges, which would be liquid and active like stock markets, has not materialised. However, firms all over the world are weaving the Internet into many of their transactions. Much progress is being made with ebXML in 2001, and by late 2001, many B2B exchanges will have revamped their governance structures to avoid conflicts of interest.

The basic story of the Internet, that of transforming business processes using a global wide-area network with open, vendor-neutral protocols, is alive and well. Every firm in the world stands to obtain huge gains by rethinking products and processes by using the net. This is good news for vendors upstream of e-commerce deployments, such as Ariba, Sun and Indian software services firms. In the last few years, we repeatedly saw the phenomenon of incompetent execution teams trying to produce Internet-centric companies that could be sold off to VCs at a profit. These companies routinely favoured time to market over every sensible design goal. These companies burned up frightening sums of money on foolish choices of hardware and software. This phase is now behind us. The dream of the Internet, and a great transformation of the global economy, lies ahead.